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Early bird catches the worm – Retirement

When it comes to retirement planning, the sooner you start the better. You hear this constantly, but still ask why? Surely contributing more when you are older does the same thing?

Let’s give you an example of two individuals both wanting to retire at 65.

Peter is 25 and contributes £100 a month towards a personal retirement plan for 40 years at an interest rate of 6% with a 3% annual inflation increase. His nest egg will be worth around £ 301,162 at retirement.

John is 35 and decides to contribute £200 a month towards a personal retirement plan for 30 years at an interest rate of 6% with a 3% annual inflation increase. His nest egg will be worth £ 281,416 at retirement.

Even though John’s monthly contribution was double that of Peter, he still came out with around £20,000 less at retirement. If he had started at the same time as Peter, he would have accumulated £ 602,344 in his retirement nest egg. He lost around £320,000 because he waited 10 years.

The miracle of compound interest.

Compound interest is not only the interest you earn on your contributions but also the interest you earn on the interest. The longer you invest, the more interest you earn on your savings. Very often the interest you have earned at retirement exceeds the contributions you made.

The contributions Peter made added up to £90,481 and the compound interest he earned was £210,681.

The best thing you can do for retirement planning is to give it time to grow.

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